Macroeconomics

23 December 2013

Keeping Switzerland's Currency Low 

Switzerland’s national bank is fighting to defend the franc against currency traders seeking a safe alternative to the euro.


What’s wrong with traders looking to the Swiss franc as a haven from the uncertainties of the euro and other currencies? When the EU debt crisis flared up in 2011, traders bought the currency, driving up its exchange rate against the euro and making Swiss exports more expensive.

That prompted the national bank to commit to intervening in the currency markets, if necessary, to cap the exchange rate at 1.2 francs per euro. It’s a vital issue for Switzerland because a substantial part of its economy depends on exports to its European neighbors.

Economists wonder how long the central bank will continue to defend the Swiss franc. Its loose monetary policy has kept interest rates low, causing the nation’s real estate market to heat up.

That has resulted in lending rising faster than the economy as a whole, putting experts on the alert for signs of imbalances that could cause trouble.

With unemployment around 4%, Switzerland appears to have averted much of the damage that the financial crisis and its aftermath have inflicted on the rest of the eurozone, where the jobless rate averages about 12%. Its GDP is forecast to grow by about 2% in the year ahead, roughly double the average rate expected by its European neighbors.

The Swiss have a strong independent streak, but their economic fortunes remain closely entwined with those of the EU. The test of this stance may come down to whether the central bank can keep the franc’s value in check without causing problems in other areas.